Foreign Direct Investment situation in Bangladesh in 2016 Challenges of FDI in 2017

rifat ahsan

[Company name] [Company address]

Introduction As a developing country of third world, Foreign Direct Investment (FDI) plays an immense role

building up the country’s economic and infrastructure development of Bangladesh. The recent

FDI situation just touched a remarkable sign in the history of the country. In South Asia,

Bangladesh is ahead of all countries except India which was the 10th largest FDI recipient

country in the world in 2015, receiving $ 44 billion. Bangladesh has witnessed the highest

growth among the South Asian countries due to stable and favorable investment atmosphere

prevailed in the country last year. This report mainly focuses on the current situation of FDI in

Bangladesh and upcoming challenges it would face.

Current Macroeconomic condition of Bangladesh

GDP Growth:

The government has fixed 7.20 percent GDP growth target for FY17. In FY16, target growth rate was 7 percent which is 0.2 percent less than the FY17 GDP growth target. Achieved growth in FY16 (provisional) is 7.05%, an appreciable accomplishment considering the sluggish pace of recovery in global economy. However, during this time the number of factors such as the favorable political atmosphere, private sector credit growth (stood at 15.2 percent which exceeded the target as of March 2016), garments export growth (increased significantly) and private consumption (increased due to the salary increase of government employees) will help to achieve growth target.

Revenue Collection:

The government has set the total revenue target at Tk.242,752 crore (tax and non-tax revenue) for the FY17, which is around 12.4 percent of the total GDP. Projected deficit is Tk.97, 853 crores. Historically, the government has never achieved its revenue target and the dispersion is rising in last three budgets. Only in FY12 the target revenue was achieved. The average deviation of actual revenue from target revenue for the last five fiscal years (FY12-FY16) stands at 8.9 percent.

Government Expenditure:

Ministry of FinanceSource: TargetActual

Figure 7: GDP Growth

FY'17FY'16 (P)FY'15FY'14FY'13FY'12FY'11

7.5

7

6.5

6

5.5

5

7.207.00

7.307.207.207.00

6.707.05

6.55

6.066.01

6.526.46

Total expenditure has been estimated to be Tk.328, 624 crores in the proposed budget for FY17 which is 16.8 percent of total GDP and 27.9 percent higher than the revised budget for FY16. Among total expenditures, the government has estimated Tk.117, 027 crores for development expenditures which are around 6 percent of GDP and 22 percent higher than that of revised budget FY16. On the other hand, the size of proposed ADP allocation is Tk.110, 700 crores which is 5.6 percent of total GDP.

Foreign Grants / Aid:

The total foreign aid disbursements during July to April, FY16 increased by USD0.19 billion or 7.82 percent and stood at USD2.68 billion compared with USD2.48 billion during July to April, FY15.

The net receipts of foreign aid were also higher and stood at USD1.94 billion during July to April, FY16 compared with the same period of the preceding year.

Remittance:

Remittance receipts decreased by 3.05 percent and stood at USD13.45 billion during July to May, FY16 compared with the same period of the previous year. Remittance receipts decreased sharply by 8.79 percent (y-o-y) and stood at USD1.21 billion in May 2016 compared to the same month of the previous year. While remittance receipts increased by 1.22 percent in May 2016 compared with that of April 2016.

Export and Import:

Source: Ministry of FinanceForeign Aid (Yearly)

Figure 13: Yearly Foreign Aid (in crore Tk.)

FY'15Actual

FY'15Revised Budget

to April)FY'16 (Up

Actual

FY'16Revised Budget

FY'17Budget

6000.005000.004000.003000.002000.001000.00

0.00

The performance of external sector of the economy during the first ten months of the current fiscal year has been unsatisfactory due to sluggish growth in the export which led to the negative trade balance as the previous year. So, it is easy to assume from the past data that the performance might follow the same trend as now. Export earnings increased by 8.95 percent during July-May, 2015-16 compared to the same period of the preceding year and stood at USD30.67 billion.

Industrial term loans:

The disbursement of total industrial term loans during January to March 2016 increased by 36.81 percent and stood at Tk.18, 264.60 crores as compared to Tk.13,350.62 crore during January to March 2015. On the other hand, the recovery of industrial term loans increased by 18.21 percent and stood at Tk.12,436.75 crore during January to March 2016 against Tk.10,520.96 crore during the same period of the previous fiscal year. The outstanding amount of industrial term loans at the end of March 2016 stood at Tk.142,145.66 crore which is higher by 23.06 percent compared to last year.

Inflation:

The rate of inflation has been declining since the beginning of the current fiscal year. The twelve-month average general inflation moderated to 5.98 percent in May 2016 from 6.04 percent in April 2016 and 6.46 percent for the same period in FY15. The average food inflation fell to 5.07 percent in May 2016 compared with 5.27 percent in April 2016 but at the same period in FY15, it was recorded 6.81 percent or 1.74 percent higher than May 2016.

Reasons Behind choosing Bangladesh for Investment place

• Faster growth in industry (overtaken agriculture)

• Developing infrastructure – significant target for infra investment

• Export springboard – access to all the large markets of world

• High demand for technology transfer

• Continued business environment reforms on global investors spotlight

• Strong local market and growth

• Competitive utility cost

Current FDI situation in Bangladesh

Bangladesh has witnessed the highest foreign direct investment (FDI) in last year exceeding $ 2 billion mark, reports the BSS. The World Investment Report 2016, released today by the United Nations Conference on Trade and Development (UNCTAD) showed that Bangladesh registered 44 percent growth in receiving record breaking FDI of $ 2.235 billion in 2015.The FDI receipt was 44.10 percent or $ 684 million higher compared to that in 2014.In terms of gross FDI inflows, the amount stands at $ 2699.05 million which was 31.08 percent higher than in previous year to $ 2058.98 million.

In South Asia, Bangladesh is ahead of all countries except India which was the 10th largest FDI recipient country in the world in 2015, receiving $ 44 billion. Inflows to Pakistan and Sri Lanka declined to $ 865 million and $ 681 million respectively while In Nepal, FDI inflows rose by 74 percent to $51 million last year. According to the report, country's power, gas and petroleum sector received highest FDI of $ 574 million followed by textile and wearing $ 443 million, telecommunication $ 255 million and banking $ 310 million. In 2014,the FDI receipt of power, gas and petroleum sector was only $ 50 million.

The trend of reinvested earnings increased in 2015 by 15.74 percent which signified the confidence of the investors to come in Bangladesh. Recovery in FDI was strong in 2015. Global FDI flows jumped by 38 percent to $ 1.76 trillion, highest since the global economic and finance crisis of 2008-09. The report said a surge in cross-border mergers and acquisitions (M&As) to $ 721 billion, from $ 432 billion in 2014, was the principal factor behind the global rebound.Besides, the FDI outflows from Bangladesh rose slightly to $46 million last year from $44 million the year ago. This year, the UNCTAD's report looks into global financial flows against the background of stalling global growth, falling commodity prices and geopolitical tensions. The report said global FDI flows are expected to decline by 10-15 percent in 2016. Over the medium term, flows are projected to resume growth in 2017 and to surpass $1.8 trillion in 2018.

Attractive feature that allure the investors to invest in Bangladesh

Large educated and motivated youth

57% of the population is under 25 years’ old High literacy rate (72%) among youths aged 15-24 Inspired young, hungry for work and growth 2 million youth entering in job market each year

Increasing trade integration Labor cost advantage (less than half the average of other Asian economies) Already the second largest garments exporter globally with other sectors coming up such

as IT outsourcing, ceramics, light engineering, etc. Progress on SAFTA, BIMSTEC talks

Increasing urbanization

Urbanization rate is fast; will double over the next four decades rapid industrialization, infrastructure development and demographic shifts Dhaka will be the world’s 5th largest city with a population of 19 million by 2019 (UN forecasts

Investment Environment in Bangladesh

Bangladesh is one of the top exporters of readymade garments to USA & Europe

Risk factors for FDI are the minimum in Bangladesh Bangladesh never posted negative economic growth during the past

30 years Bangladesh has ‘never defaulted in its debt repayments, nor asked for its

rescheduling Bangladesh has an open, market based economy led by a vibrant and

innovative private sector which provides the main stimulus to its growth Bangladesh is a homogeneous country with no religious, ethnic or other

forms of cultural conflicts Bangladesh is one of the largest contributors to UN peacekeeping

FDI in Bangladesh On the View of Foreign Reports at A Glance:

Citi Investment Research & Analysis termed Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam have the most promising (per capita) growth prospects.

Goldman Sachs branded as Bangladesh is in ‘Next 11’ list after the BRIC nations

The International Monetary Fund (IMF) commented on the economy of Bangladesh as Resilient export and remittance flows have bolstered growth and external stability

The Wall Street Journal (WSJ) dismissed the previous branding of Bangladesh saying, 'Basket Case' No More - with a higher growth rate, a lower birth rate, and a more internationally competitive economy.

JP Morgan Chase commented Bangladesh The country ranks fourth in growth in economically active population.

Morgan Stanley has commented Bangladesh is at the very early stages of an investment boom

New York Times has termed Bangladesh as “an unlikely corner of Asia,strong promise of growth”

An HSBC report (2012), titled ‘The World in 2050’, listed Bangladesh as one of the top 7 countries expected to deliver the fastest growth enrooted to 2050.

“World Economic Situation and Prospects 2013” of United Nationstermed Bangladesh as “strong growth performances continued”.

The Global Competitive Report 2013” of World Economic Forum (WEF)reported that Bangladesh has elevated to 8 stages point this year

McKinsey & Co. in its latest survey Viewed "Bangladesh is still No.1,”as the global sourcing hub for RMG

Sector wise opportunities of investment

Investment Controlled Industries (considered as strategic investment. Free toinvest but requires pre-approval from specific regulatory agencies)

1. Fishing in the deep sea2. Bank/financial institution in the private sector3. Insurance Company in the private sector4. Generation, supply and distribution of power in the private sector5. Exploration extraction and supply of Natural gas/oil6. Exploration, extraction and supply of coal7. Exploration, extraction and supply of other mineral resources8. Large-scale infrastructural project (e.g. flyover, elevated expressway, monorail, economic zone, inland container depot/container freight station)

FDI POLICY of Bangladesh

The National Industrial Policy, 2010 of Bangladesh recognizes:

1. Private sector is treated as the engine of growth2. No upper ceiling for foreign investors or performance requirements3. 100% foreign equity is allowed4. All industrial sectors are open for foreign investors for investment5. except 4 reserve sectors for the government.6. Equal treatment for both local and foreign investment7. Export oriented industries are given top priority

FDI Policy Framework

Fiscal Incentives & Financial & Other Incentives

Fiscal Incentives Financial & Other Incentives

• Corporate tax holiday: 5 to 7 years for selected sectors and areas

• Tax holiday for infrastructureinvestment: up to 10 years

• Accelerated depreciation on cost of machinery for new industries in lieu of tax holiday

• Avoidance of double taxation under bilateral tax convention

• Tariff concessions on import of capital machinery

• Tariff concessions on import of raw materials of the export oriented industries

• Bonded warehousing facility

• Cash incentives and exportsubsidies ranging from 5% to 20%on the FOB value of selectedproducts

• Funds for export promotion, exportcredit guarantee scheme, permissionfor domestic sales up to 20% byexport-oriented company’s outsideEPZ.

• Remittance of royalty, technicalknow-how and technical assistancefees

• Citizenship by investing a minimum of US$ 5,00,000

• Permanent resident permits on investing US$ 75,000 And many more.

Cash Incentives For FY 16-17

Sector Wise Incentives

• 0% and 1% customs duty rate is in force for the import of industrial capitalmachinery and spare parts.

• Special concessionary customs duty rate for import of raw materials for Ship-Building Industry, Pharmaceuticals Industry, Textile Industry, ToysManufacturing Industry, Telecommunication Industry, Handloom Industry

• Raw materials, machinery and spare parts of poultry and dairy farms, SolarPanel Manufacturing Plants are exempted from customs duty

• Import of raw materials by Generator Producing and Assembling Industry isexempted from customs duty

• Raw materials, machinery and spare parts imported by power generationplants are exempted from customs duty

• raw materials, machinery and spare parts imported by Oil and Gasexploration and extraction companies, and also by CNG filling station areexemptions from customs dutyMedical equipment’s and medication materials are exempted from customs duty

• Technical grades imported by the pharmaceutical raw materials producingindustries are exempted from customs duty

• Specific utility goods imported by textile industry are exempted from customsDuty

• Import of De-inking chemicals and waste paper by newsprint papermanufacturing industries is exempted from customs duty

• Special concessionary customs duty rate is allowed for the machineries andmaterials imported for the construction of residential hotels for the development of tourism sector

• Special concessionary customs duty rate is in force for the import of chemicalmaterials by the leather industries

• Imports undertaken by 100% export-oriented industries are exempted fromcustoms duty

Problems of Foreign Trade in Bangladesh

Legal Constraints: The first and the foremost problems in foreign exchange operations arise due to legal constraints. Since foreign trade indicates exchange of goods and services between two countries and each country has its own laws, rules and regulations, which are different from other countries, so problems arise in foreign exchange operations. For example, an exporter of Bangladesh receives an L/C from the importer of England in which the goods will be shipped in American ship and delivered in China. In this case according to which country’s law the dispute, if arise, will be settled, is a problem

Geographical Location: From the geographical viewpoint, Bangladesh is not located in such a place to trade vigorously. We have encompassed by India from three sides. And India enjoys a strong industrial base compared to us. Due to economy of scale India can produce the same quality products at a cheaper price. So this is a problem in foreign exchange operation 

Limited Skilled Manpower: Performing the foreign exchange activities is a very tough job because it involves proper communication with the client, various banks of the country as well as abroad. A single error may cost thousands of dollars

Limited Export Base: Bangladesh has a very limited export base. It does not have the sufficient supply of raw materials needed to use in the production process. If Bangladesh has the local raw materials, it would be able to use them in the production process. But unfortunately the country has to import the raw materials required in various production processes

Political Instability: Another major problem to conduct foreign Exchange business is the political instability of a country, as the political stability is essential for smooth foreign exchange operations.

Absence of Policy, Rules and Regulations of Foreign Exchange Operations as per Islamic Shariah: There is no international Policy, Rules and Regulations of Islamic Banking Regarding Foreign Exchange Operations, so the Islami Banks has to face problems in foreign exchange operations

Factor affecting FDI growth

Political culture

Bureaucracy

Inadequate infrastructure

Sloth information

flowSluggish

administrative bodies

Corruption

Power crisis

Inefficient port handling

Lack of Stable Policy: Policy and structure are an integral part of any kind of operation. It will suggest us how to perform the operation. But if the policy continues to change frequently it is not easy to plan and perform also. With the changes of Government new policies are formed, which is very difficult to cope with. It is hard for the business organizations and businessmen to settle themselves. They are always deviated from the old track, and have to run after the new track. This is another problem of our country

Lack of communication and transportation facilities: The Lack of communication and transportation facilities are more in Bangladesh as a result the foreign investor cannot establish their business.

MAIN ISSUES TO OVERCOME

1. Strong political leadership2. Ensuring utilities supplies3. Reducing corruption4. Strengthening diplomatic relationship5. Arranging Trade Fairs6. Infrastructural development7. Political Stability8. Reducing Bureaucratic Hassles

Providing One Stop Investment Facility Services to the Investors: One stop investment services like Trade License, TIN, VAT registration, Environment Clearance, Boiler Clearance, Joint Stock Registration, Export / Import Registration, Copyright, Patents, Trade Marks, Industrial Designs etc. has to be offered digitally to avoid corruption and delay in decision making.

Post investment services: package of thousand days post investment services could be offered for the foreign investors to monitor and guide sustainable investment.

RECOMMENDATIONS

Ensure of Good Governance Coordinated Government Agencies Dynamic and Independent Govt. Agencies Accountability and Transparency Developing Diplomatic Relation Devoting Efforts to Shift FDI Track Ensuring Power and Energy Political Reformation

Sources

http://www.doingbusiness.org/rankings http://www.bangladesh.gov.bd/ http://boi.gov.bd/ https://www.cia.gov/library/publications/the-world-factbook/geos/bg.html Bangladesh Economic Update ,Vol. 3, No. 2, February 2012 http://www.populstat.info/Asia/bangladc.htm http://www.fdiintelligence.com/ Rahman,A.,(2012): Foreign Direct Investment in Bangladesh, Prospects And Challenges,

And Its Impact On Economy